At this time of year I always get asked where to invest for the next 12 months for the best return. The problem I have is that while I am a share market expert, I don’t have a crystal ball!
Every day I analyse the share market to determine what I believe may be the best and most appropriate investments for the coming month and year. Share market traders do not control the market, and like you, we must always look at any investment in terms of probability. I make decisions about trading and investing in a very similar way as I make business decisions. Here’s how I examine the ratio of risk versus reward.
When undertaking a new venture or project in my business, I follow some simple steps, starting from conducting research to doing detailed plans and sensitivity analysis. It’s all designed to look into the risk and reward of the new venture to determine if the likely outcome is worth the time, effort and resources.
So how do I go about determining the best investment for the share market?
Contrary to what most people do, my first step is to always study the big picture in a form of top-down analysis: whether the overall market is more likely to rise or fall in the coming year. Then I break my research down into the sectors of the market that I believe will perform best. Lastly, I look at the individual shares within each sector to determine the companies to invest in.
The research I do is mainly technically based and doesn’t get too detailed. I look at what the share or share market has done in the past, and what are the current opportunities and threats. Then I consider the best strategy for both an entry and an exit.
In essence, I treat my investing and trading in the same way as I treat my business, and I suggest you do the same. Let’s face it, every businessperson I know has gone into business to make money and every investor and trader I know has the same idea. The challenge for most is that, to their detriment, they do not treat investing and trading in the same mindset as they would apply to their business.
So, my thoughts for the Australian market in 2013? In short, I think the first half will be more “bullish” [rising] and the second half more “bearish” [falling]. Last month I recorded an online seminar (link is password-protected) with our senior analyst, Janine Cox, in which we shared our thoughts on the Australian market and other world markets. Further, you might like to revisit my LeadingCompany article “The best time to buy” as this will help you to better understand our market.
Following steady rises since November, the All Ordinaries Index has now moved well beyond 4700 points; I set my short-term target zone between 4800 and 4900 points. This was partly achieved on the back of news that the US fiscal cliff had been averted, at least for the time being, following the US Congress decision to raise taxes on the rich and put off the automatic budget cuts for two months.
Right now the market is unfolding as expected and this supports my analysis, which indicates that it is likely to continue to rise beyond the April 2011 high of 5069.50 points. Given this, the Australian share market presents a good opportunity for investors to make some short-to-medium term gains through to around March and possibly longer. That said, our market is due for a four-year top this year, so I expect that sometime in the second half of 2013, the market will start making its way down again.
Some of the sectors I see as having value right now are financials, consumer staples and industrials. Some of the more interesting shares in the S&P/ASX100 are banks like ANZ and NAB, WES, ASX, BXB and SEK.
Keep in mind that interest rates may fall further this year and so investors will start to move from cash into shares with good dividend yields.